I had read Professor John Kay‘s Review of UK Equity markets and long-term decision making but it wasn’t till I heard him speak yesterday that I “got it”.
Kay’s concern for the state of the UK financial services market goes much wider than his comments on the dysfunctional UK capital markets. His two themes yesterday were the growth of the trading culture and the impact of increased intermediation.
The simplicity of Kay’s remarks is obviously born out of deep thought . If you get a chance to listen to this man, do so.
To get a view on his style, try this video.
Kay’s basic premise is that there is an asymmetry within the financial systems that rewards those within the financial services industry at the expense of those outside it.
Kay thinks in terms of “what pays” and thinks from the point of view of society rather than any interest group.
Investors’ returns are kept small by the “extraordinary” chain of intermediation in financial services – from custodians to consultants to platforms and more – which all have to be paid.
“The amount they take out of the chain in a low return environment can be the totality of what is generated by the chain,”
Kay also suggests that stock markets are no longer effective in their role to raise money for users of capital. He claims few companies go to the stock market to raise capital and argues those that do view initial public offerings merely as a way for employees and early stage investors to cash in their shares.
“The paradox is that stock markets are not a means of putting money into companies, but a means of getting it out,” .
Clearly his remarks did not resonate with all at yesterday’s meeting. Indeed the copnference’s host , assuming John had left the auitorium was keen to distance himself from the central thrust of Kay’s address.
He prefaced his remarks ” I can say this now John Kay has left the room…”
But John Kay had not left the room and in a pantomime moment, the audience made this perfectly clear.
The site of this imposing man standing in front of the stage facing his critics mingled farce and dignity in an enervating way.
The financial services industry needs John Kay and it needs him within the room not out of it. We need structural reform that makes the financial services sector and the people who regulate it, more effective.
The financial services sector has not performed the basic tasks it is supposed to do very well in the last ten years. It has however made the insiders , like those in the room, very rich.
I agree with him that this situation is not sustainable and that better ways of doing things need to emerge.
For this to happen, we need to dis-intermediate, simplify and re-appraise what we are doing.